RBC economists Claire Fan and Nathan Janzen said the US decision on 1 July not to extend CUSMA does not end the agreement. They pointed out that CUSMA runs until 2036, with pre-scheduled negotiations over the next decade intended to support continuity beyond that point. Near-term trade risks for Canada remain, while a scenario of outright termination was described as unlikely if economic reasoning holds.
They also said that if CUSMA were to falter, both the tariff rate that would replace it and the share of exports affected have declined, reducing exposure compared with earlier assumptions. Rules of Origin were identified as a likely area of scrutiny in forthcoming talks, and they said trade uncertainty is expected to persist regardless of the eventual outcome. The article stated it was produced with the help of an AI tool and reviewed by an editor.
Trade Uncertainty and Market Volatility
Given the U.S. decision on July 1st not to extend CUSMA, the primary factor for us is not the risk of immediate cancellation but the start of a long period of trade uncertainty. While the agreement remains in place until 2036, this move signals that future negotiations will be contentious. This environment of doubt is where we can find opportunities.
We are already seeing the impact on the currency markets, with the Canadian dollar dropping to a three-month low of 0.7380 against the USD in the past 48 hours. Implied volatility on USD/CAD options has jumped, reflecting the market’s anxiety. We should consider buying call options on the USD/CAD pair to profit from further loonie weakness driven by negative headlines.
This uncertainty will also hit Canadian equities tied to cross-border trade, especially in the automotive and manufacturing sectors. We saw the S&P/TSX Capped Industrials Index dip 1.5% yesterday on the news. We should look at buying put options on specific export-heavy companies as a hedge or a speculative bet against disruptions from future negotiations on topics like Rules of Origin.
Strategic Approaches for Volatility
This situation is reminiscent of the 2017-2018 NAFTA renegotiations, where every political headline caused sharp swings in Canadian assets. During that period, the loonie experienced several 2-3 cent swings within weeks based purely on negotiation rhetoric. We expect a similar pattern of headline-driven volatility to emerge over the coming months.
Our strategy should therefore be centered on volatility itself. We can use derivatives like straddles or strangles on currency ETFs to profit from large price swings in either direction, without needing to predict the specific outcome of political talks. The key is to position for movement, as prolonged uncertainty makes sharp market reactions more likely.
